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Sunday, January 31, 2010

In the previous two parts of Methods of Madness, we discussed the main purpose behind Economics @ Home. We also mentioned that Economics @ Home is one of the parts of a grand scheme of things in my project towards sharing a greater good.

In this third and final instalment of Methods of Madness, we shall discuss the many simultaneous projects that are ongoing which are currently being managed by the Lean and Mean Machine. But first, let me first explain the choice of the name, the Lean and Mean Machine. As cliched as it sounds, the name is a constant reminder of the company's purpose of being. This is discussed in Volume 1 Issue 2 of Economics @ Home. To recap, the company is built on a minimalist approach. It aims to be the most profitable business by minimizing costs to a necessary level.

But how do we achieve the greater good by attempting to maximize profits? Isn't this a little contradictory? To answer this question, we must first understand the projects that are currently under the Lean and Mean Machine. First, I would like to stress that costs are minimized to the necessary level, which is to say, the money will be spent in all ways necessary to achieve the goals of the company, and that is to share the greater good.

So, the second function of the Lean and Mean Machine is to become a fund manager. Currently, without a license, it is illegal for the company to accept deposits to manage your funds for you. You may be disappointed to know that currently, the company does not fulfill all the requirements needed by the Securities Commission to become a fund manager. Nonetheless, I am collecting experience in managing the profits of the company with the goal of growing the currently meagre pool of funds via capital accumulation. There are two purposes for becoming a successful fund manager. First, the Lean and Mean Machine wishes to provide an equal opportunity for everyone to enhance the growth their wealth. Second, part of the proceeds of the investment gains will be used to fund the other projects of the Lean and Mean Machine.

The third function coincides with the third goal of Economics @ Home:

[3] to maximize the potential of everyone through the sharing of experiences and knowledge.

The Lean and Mean Machine aims to start a university, and more specifically, a university of life. While typical universities offers degrees for students in a specific field of study, the goal of this university of life is simply to maximize the potential of its students. The university will prioritize the cultivation of skills and experiences that will prepare them the best to face life's challenges. As the wise Benjamin Graham said, "Luck is when preparation meets opportunity". This is definitely a longer term plan but I am proud to announce that the baby steps are in place. In every institution of knowledge, one of key resources is without a doubt, knowledge itself.

A few months ago, I started a self-help library that contains books that are mainly targeted towards self improvement. I am currently accepting donations for all kinds of self-help books that you don't need and once I have a considerable collection, I will open the library for public consumption for a minimal fee to preserve the quality of the books in the library, and hopefully to add on to the growing collection.

So the start of the university is at its library, which is still yet to be named. If you feel the need to express some of that pent-up creativity, please do not hesitate in sharing some of your ideas. I am willing to consider all ideas seriously.

The fourth project, which is also at its infancy stage is the Inspirational Doses blog. It's address is inspirational-doses.blogspot.com. The main purpose of the blog is for everyone to share inspirational experiences in hopes of guiding the hungry and the foolish among us towards greater heights. As the name suggests, the blog is meant to provide doses of inspiration. It is not meant to be frequented regularly because one simply can't be too inspired. Inspiration is meant to be taken in small doses when we feel down or lost or simply when we need to be jolted from a lack of motivation.

These four projects will form the backbone for the purpose of being of the Lean and Mean Machine. Some may consider the greater good as ideals that are placed above the clouds but a wise person once told me that if we aim for the stars, perhaps one day, we might end up among the clouds. In many ways, the goals of this company are probably a dream of a madman. Nonetheless, even madmen have methods. It is my wish to see you among the clouds.

Sunday, January 17, 2010

In the last issue, we saw many examples in which our hard-earned money is taxed from us and how it was wasted via inefficiencies in government spending. In this issue of Economics @ Home, we will examine why there might be a need for a GST.

As mentioned in Part 1, taxes are used as revenue to cover the federal expenditure. It is no doubt easy to criticize the government for misusing the collected revenue. But as we mentioned, solving these structural "inefficiencies" is a long and arduous process. So, it is probably not that constructive to talk about that at this point in time.

First, what exactly is this GST? Anyone who has been to McDonald's should know roughly how this works. We see a government tax of 5% every time we purchase something at McD. That's basically the same idea. In some restaurants, we even see an additional 10% service tax, or service charge. These are called ad valorem taxes, which are fixed rate taxes on the value of the goods or services purchased. So now, you might be thinking, gosh, the next time I eat at Mickey D's, I will be taxed at 10% instead of 5% and Italiannese would be charging me 20% on top of my hefty bill. Well, fortunately for us, that will not be the case as the government has promised to implement the GST in place of the government tax and service tax.

The next question is, how will we be affected? I am no tax lawyer or accountant or anything of that sort. I don't know the exact implications of these new tax structures. But I can tell you what the objective of the GST should be. But first, we should probably ask, why do we even need the GST in the first place?

As mentioned in Volume 2 Issue 1, the personal income tax rate in Malaysia is too high compared to our neighbors. Not only is it unattractive for foreign talents, but high taxes are counterproductive. Imagine that for ever RM1 you earn, 26 sen will go to the government. There is less incentive to work harder or longer than if you were to keep 90 sen out of the RM1 that you earn. Of course, ideally, from a consumer's point of view, we should not be taxed at all, but that is most certainly not feasible due to the expenditure incurred via public goods such as education, utilities, healthcare and more recently, climate control measures. So, we have re-established that the surety of taxes (the other being death).

At an individual level, the high personal income tax may not seem entirely significant. However, at a corporate level, sucking out 25% of a company's profits will significantly reduce its competitive edge. With a quarter of their cake eaten, companies are less likely to engage in research and development or innovative efforts. Without keeping up with the latest technology, how are companies in Malaysia going to stay competitive over the long run?

In a more specific example, petroleum taxes contribute to about 10% of Malaysia's total revenue. As we all know, most of this, if not all, comes from Petronas. With so much money being sucked out of Petronas, it is no wonder that they face difficulties in competing with international oil firms in oil-finds as well as R&D.

These are two examples why the government cannot solely depend on income taxes for revenue, which justifies the widening of the tax base. Of course, to run the government like a profit-generating business to source income is not viable simply because the government is charged with preserving and promoting the well-being of the public, which in most cases, do not align themselves with profit-maximization. Hence, we need a more reliable tax system, which is the GST. Now, we have finally arrived at this juncture: Why is the GST so good?

For starters, let it be clear that the GST is not better than personal income tax. They are supposed to work hand-in-hand with each other. We have been talking about this idea of a broader tax base but not really explaining what it really means. To elaborate, a broader tax base is one that is more consistent and reliable. Personal income taxes (including corporate profit taxes) are more susceptible to changes in business cycles. GST is a tax on consumption, which constitutes two portions, necessary consumption and induced consumption. While induced consumption is dependent on income levels and employment, which are susceptible to business cycles, autonomous consumption, is believed to be stable.

One of the most common arguments against the GST is that it is regressive in nature. This is total junk because the definition of a regressive tax is where the lower income group is taxed at a higher percentage than the higher income group. If a constant percentage of tax is applied on goods and services, it is called a proportionate tax. The rationale that the GST is regressive is based on the argument that it is inequitable it creates a "larger" burden on the poor. How is it unfair if the poor is taxed at 4% and the rich is taxed at 4% as well? The whole idea of a proportionate tax is to incentivize productivity. Those among us who are able to earn more because of their competency and productivity should be allowed to enjoy their income earned. The demand of income equality is a poor man's excuse for being lazy. However, equality in terms of opportunities is another issue altogether and we will leave that discussion for another day.

The reader should also be reminded that I am not arguing for the sole use of the GST as a revenue source. It should work hand-in-hand with the personal income tax, which is already progressive in nature, and is meant to somehow "re-balance" income inequality. A combination of a progressive tax with a proportionate tax still yields a progressive tax where the rich are still being taxed at a higher percentage than the poor.

While common sense clearly points to the fact that the GST is necessary to achieve sustainable growth, implementing it is a whole new ball game. One of the main challenges in implementing the GST include the lack of political mandate. In face of the "silent roar" during the General Election in March 2008, the government has to appear rakyat-friendly (people friendly) in every action that they take. So they have to give all the right excuses and reasons so that the general public does not perceive the implementation of the GST as a heavier burden on the less wealthy.

Guess what, the GST is supposed to cause a heavier burden on the lower income groups. But why? To see the true picture, we need to take a step back and see the sickness that Malaysia is in. We have been running budget deficits for 12 consecutive years because of the white elephant projects that the government has undertaken in the past 20 years or so. Whether we like it or not, we owe people money and we need to pay it back. How do you feel about someone who keeps borrowing money from you for 12 consecutive years and never really paying it back?

In order to reduce this deficit, we need to collect more revenue than our expenditure so that we are able to service our debts. So if we intend to lower our income taxes to attract foreign talent, we NEED to raise taxes somewhere else. The government can pretend all it wants in claiming that the tax is not going to increase the people's burden. It will and it most definitely should. This is the bitter medicine that we must all take.

The other issue is of course, the issue of timing. When do we apply these taxes? Should it be at the turning point of an economic downturn? To be honest, now is as good a time as any. This is more a political issue than an economic issue. It is never really too early to implement something good. From the consumer viewpoint, more taxes are most definitely not even close to the category of "good", but as we all know, Economics @ Home prioritizes the greater good.

Of course, as discussed, the structural inefficiencies still remain. We can only put on our optimistic hats and hope that the people's voice will truly be heard. Hopefully, change is on the way. In the mean time, we need to swallow this bitter medicine, stick it out until our illness is cured.

Sunday, January 03, 2010

To almost any wage-earning individual, the word "tax" is like a huge taboo. Any implementation of new taxes would certainly result in public discontent, which is probably an understatement considering the absurdities that are going on in Malaysia. Before we delve into that, let's just try not to curse aloud and approach this topic with constructive optimism.

This article will examine some of the possibilities resulting from a GST, in hopes of keeping your minds open, or to open them, if they are not already open, with its impending implementation in in Malaysia in the near future.

As always, before we begin any discussion, let us first lay down our foundation as to where we stand today. With one of the highest (if not the highest) income tax rates in the region at 27% for the highest tax bracket (annual income exceeding RM100,000), the tax burden on individuals sure seems heavy in Malaysia. Compare this with the tax rate in Singapore, which is at 20% for the highest tax bracket (annual income exceeding SGD320,000). Comparing dollar for dollar, the tax rate for Singaporeans earning SGD80,000 to SGD160,000 is 14%, almost half that of Malaysians. Stop swearing!

So we wonder why the only foreign talent we can attract are "professional" housekeepers from Indonesia and "professional" petrol station attendants from Bangladesh. It is clear that our current tax environment is not ready to attract highly skilled and talented workers from abroad. What's worse, the tax environment is not even conducive for keeping homegrown talents who simply have to walk across the Causeway (it is possible) to enjoy greater tax savings. That is not even accounting for the higher wages and living standards that Singapore offers.

That is one of the most detrimental effects of our high tax rate at the moment. Before we go on cursing the government about the absurdly high tax rates, let us first think about why are taxes necessary. The most common argument would be to use tax revenue for public goods such as street lighting, road paving, and also compensating government employees. The government also subsidizes schools, housing projects and other infrastructure development that would otherwise be "inefficient" if left to the market because the market does not take into account positive externalities. So says conventional economic theory.

If you have lived in Malaysia for a sufficiently long period of time, you will know that nothing in Malaysia is subject to conventional theory. First of all, there is nothing efficient about the allocation of tax revenue in Malaysia. According to a report by the Auditor-General in October 2009, billions of dollars worth of projects were not satisfactorily implemented and I am fairly certain that many of these projects were abandoned while the contractors escape with full pockets.

Let me just go through a few examples of absurd expenditures:

Kolej Kemahiran Tinggi Mara Balik Pulau in Penang paid RM84,640 for two laptops or RM42,320 per laptop and spent RM2.08mil on computer software that was not used, among other things.

I have never in my whole life seen a laptop that costs more than RM20,000 before, let alone RM40,000. What does a RM42,000 laptop even look like? You could probably build a mainframe with that amount of money.

Here are some more examples:

Weaknesses revealed in the report included the Finance Ministry’s public infrastructure maintenance programme, basic infrastructure programme and parliamentary constituency rural development projects involving RM4.59bil for 92,687 projects from 2005 to November 2008 that were still not satisfactorily implemented.

The report highlighted that the Agriculture and Agro-based Industry Ministry’s Tanjung Manis integrated deep-sea fishing port in Mukah, Sarawak, built at a cost of RM313.62mil, did not achieve its “main objective” because of project delay, unsatisfactory work quality and non-completion or non-construction of certain basic facilities.

The report said a total RM68.38mil had been spent on the programme as at Dec 31, 2008, but 156 completed centres were still not registered in the name of the Federal Land Commissioner. The programme has been ongoing since the Eighth Malaysia Plan (2001 to 2005).

Weaknesses were also noted in the Science, Technology and Innovation Ministry’s human capital development programme where targets of schemes were not fully achieved, payments were made to unqualified recipients as well as inefficient monitoring and evaluation of the programme. The programme cost the Government RM153.73mil from 2006 to 2008.

If you didn't know any better, you would think that these reports are bad enough. Let's not forget the mother of all leakages, the RM12.1 bln PKFZ scandal.

So with all these leakages or rather, euphemistically put, inefficiencies in spending, should Malaysians not be cursing about the implementation of more taxes? Nonetheless, addressing these issues require a long and arduous process to stem out corrupt bureaucrats. The question is, can we wait until we are able to minimize these leakages before we implement the GST?